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“IMPAIRED ASSET”-ALL YOU NEED TO KNOW-COMPILED BY ER. AVINASH KULKARNI

Saturday Brain Storming Thought (128) 28/08/2021

COMPILED BY ER. AVINASH KULKARNI

IMPAIRED ASSET

An impaired asset is an asset valued at less than book value or net carrying value

ie an impaired asset has a current market value that is less the value listed on the balance sheet

To account for the loss, the company’s balance sheet must be updated to reflect the assets new diminished value

Keynotes for impaired asset

1) assets should be regularly evaluated for impairment to prevent overvaluation on the balance sheet

2) assets most likely to become impaired include accounts receivable and long-term assets

3) a loss due to an asset impairment is recorded on both the balance sheet and the income statement

4) asset impairment occurs when the net carrying amount or book value cannot be recovered by the owner

5) asset impairment can occur from a one-time incident or a succession of events

6) company must reflect the assets diminished value in its financial statements

Occurrence of the impaired asset

1) when the value of assets acquired through a merger or acquisition has been overstated by the seller

2) when a collection of accounts receivable becomes unlikely

Impairment loss

The amount by which carrying amount of an asset or cash-generating unit exceeds its the recoverable amount

Carrying amount

The amount at which an asset is recognized after deducting any accumulated depreciation and accumulated impairment losses thereon

Recoverable amount

The amount which is expected to be recovered by use or sale of the asset, whichever is higher

Recoverable amount = fair value – disposal cost

Recoverable amount = value in use

Fair Value

It is the price that would be received to sell an asset

Costs to sell

It includes legal costs to selling and direct incremental costs ie necessary costs required for asset selling

Indicators of Impairments

1) External factors

a) significant decline in the market value of the asset
b) changes in a technological environment

c) changes in a legal environment

2) Internal Factors

a) physical damage of obsolescence of the asset

b) significant changes have taken place or are likely to take place which has an adverse effect on the entity or the manner of using the assets

Reversal of impairment loss

1) impairment loss recognized in prior years should be reversed if there is an indication that such losses do not exist any long

2) reversal amount should be limited to earlier impairment losses recognized

Accounting treatment of reversal of impairment loss

1) goodwill impairment loss will not be recovered

2) revalued assets reversal will be treated as a revaluation increase

3) other assets reversal will be recognized in the profit and loss account immediately

4) further depreciation will be charged on the revised carrying amount

Cash generating unit (CGU)

This represents the smallest identifiable group of assets that generates cash flows that are largely independent of cash flows from other assets or group of assets

Advantages of impaired assets

1) analysts and investors can make good decisions

2) many business failures are heralded by a fall in the impairment value of assets

3) such disclosures act as early warning signals to creditors and investors

Disadvantages of impaired assets

1) quite difficult to determine the measure of value which should be used while assessing an impairment

2) difficult when to recognize impairment

3) difficult to measure impairment

4) difficult to disclose impairment

Financial assets subject to impairment

1) those measured at amortized cost and at fair value through other comprehensive income

2) lease receivables

3) contract assets

4) irrevocable loan commitments

5) financial guarantee contracts that are not accounted for at fair value through profit or loss

Compiled by:-

Er. Avinash Kulkarni

Chartered Engineer
Govt Regd Valuer
IBBI Regd Valuer

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